Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Advisory Board Co-Chair of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.

China pursued an export driven growth model and the results with remarkable for as long as it lasted. Ultimately, China's size and the economic stalling of the developed world forced an adaption to a domestic growth model sooner and faster than was desired. How could consumption rise when income growth was facing major headwinds? The answer, of course, was increased debt and government spending. But the leverage increased too rapidly and now that adds to the headwind. In addition, numerous wealthy Chinese have a sensible desire to move at least part of their wealth outside the country. China needs global growth to rise so that it can transition to a more domestic driven model under less adverse conditions. We cannot expect China to be an engine for global growth and the uncertainty is very real and very high.

Investment is driven by data. Whilst prospects clearly exceed questionable data - giving a safety margin - then investment continues. When it doesnt it stops. The fear of capital loss demands coitus interruptus. Without data there is no foundation to decisions. The problem now is a question of credibilty, and once credibility is lost it takes a time to rebuild. The situation is a self fulfilling prophesy

Forecasting the future is difficult. As mentioned, China has a complex $11 trillion economy with a myriad of opposing non-linear trends that make it extremely difficult to identify the relevant patterns.

Let us be heretic, take the long-term view within a thinking experience and assume that there is no possibility of a transformation to new growth model that is a continuation of the current trajectory.

The following factors might be taken into account:

First, after stagnating for 250 years at around $600 GDP per capita, China’s growth started to explode, with the 1971 reforms and WTO accession as milestones, but not game changers. If history is any guide, the probability of a reverse to the mean is high.

Second, the political system has not experienced major shocks and replacement of elites during the last seven decades. Policy makers are socialised during a growth phase and it remains to be seen how the cope with storms. It is the rule of the thumb that authoritarian societies accelerate growth during their golden eras, but loose out when switching to new growth models, giving democratic regimes an overall higher performance, when taking into account not years, but decades and centuries.

Third, China is a clear winner of globalisation. Its rise is closely linked with new pattern of trade, the emergence of global value chains and technological revolutions, like IT and containerization. There are no similar technological determinants on the horizon that would benefit China in a similar way as it did in the past. In opposite, it cannot be excluded that global growth reverse previous “natural” advantages of China’s economy.

Fourth, China’s growth model is as much an internal achievement as induced by foreign capital, particularly US companies that outsourced labour-intensive, and later capital and environmental intensive production to China. These activities created a windfall that was successfully reinvested as well a beneficial incentive structure. Today, it is difficult to identify a similar impulse. There is no or limited experience of identifying an appropriate growth model without an active foreign partner.

Fifth, China’s competitiveness is still low, with strength in low-margin business, like railways equipment, and high-risk activities, like e-commerce in retail, see recent McKinsey analysis. The benefit of the old growth model might disappear faster than the surplus of an emerging new growth model, contributing to demanding political processes about the distribution of possibilities and resources.

Sixth, as in all other countries, the most needed reforms are politically the most demanding ones. When during a Golden era all factors are supportive, the opposite occurs during transformational phases.

All in all, independently on the quality of decision-making, it cannot be excluded that the new growth model requires conditions that need to be build up during one or more decades, as it did during the transition period from a planned to a market economy and as it happens currently in the European Union. In this case, Japanification will be the most optimist scenario for China.

As said before, forecasting is a risky business. It might all be wrong.

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The Mueller report in America, along with reports of interference in this week’s European Parliament election, has laid bare the lengths to which Russia will go to undermine Western democracies. But whether Westerners have fully awoken to the threat is an open question.

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